B&B's Woes Leave Its Deals Gasping for Aire

The recent downgrade of U.K. mortgage lender Bradford & Bingley has resulted in the breach of some triggers of its Aire Valley securitization master trust. The negative rating action could threaten certain replenishing or management provisions of the RMBS master trust.

All three rating agencies have downgraded the lender following the failure of B&B's rights issue, which sent the lender's share price spiraling down to GBP0.67 ($1.31) on June 2, representing a monthly fall of around 60%.

B&B's trading statements showed underlying profits for the first four months of the year falling to GBP56 million compared with GBP108 million in 2007.

Moody's Investors Service downgraded the lender to A3' from A2' (short-term P1' to P2'), Standard & Poor's downgraded the short-term rating from A2' to A3' and Fitch Ratings changed the rating from A' to A-' (short-term F1' to F2'). All agencies maintain the ratings on negative watch.

Fitch explained that the documents for the master trust require the basis swap provider to maintain long- and short-term ratings of A'/'F1', respectively.

With the recent downgrade, both the long-term and short-term IDR triggers fell below this level.

"To avoid adverse rating action with respect to the Aire Valley notes, B&B has a number of solutions that might be followed, including its replacement as swap provider, a guarantee from a third party with sufficient ratings or posting of collateral within 30 calendar days of the downgrade," said Francesca Zwolinsky, a director in Fitch's RMBS team.

S&P said that some of the options that B&B might implement to address the effect of the recent downgrade included transferring its obligations to a suitably rated counterparty, obtaining a guarantee for its obligations, posting collateral or taking other steps to ensure that ratings are not affected.

Ivan Pahlson-Moller, a Deutsche Bank analyst, said that the seller will not be able to sell the loans to the mortgage trustee if the trigger is breached, which it has been in the case of Moody's, but not in S&P's or Fitch's ratings.

For now, the addition of loans can be made subject to additional conditions that include providing a solvency certificate at the sale date of new loans into the trust and, in certain circumstances, also include providing pool audits. However, a further downgrade by either agency will terminate this.

The liquidity reserve fund is set at below A3' by Moody's and below A-' by Fitch. If it's breeched, the trustee is required to establish a 3% liquidity reserve fund funded from available principal receipts, Pahlson-Moller said.

In the event of a non-asset trigger, all notes would be deemed pass-through notes and the mortgage trustee would distribute all principal receipts to Aire Valley Funding 1 and Aire Valley Funding 2 until their respective shares are reduced to zero. Certain series and classes of notes would be repaid more rapidly than expected, and others would be repaid more slowly than expected.

"We consider the most serious breach of any of the above triggers is the ability to replenish the trust, for without this provision there is an increased likelihood of a minimum seller share breach," Pahlson-Moller said. "While we take some comfort in B&B's recent initiative to improve credit and default management, which we see as positive in a market with weakening fundamentals, we would caution nonetheless that the Aire Valley program does not benefit from an identified backup servicer in the extreme event that Bradford & Bingley servicing functions are impaired."